Globalization of industry has resulted in materials and
components often being supplied from multiple markets across the
world. When something goes wrong, and claims arise, it can prove
difficult to enforce your contractual rights to indemnity. What
could go wrong?
Unfortunately, lots. If your client, as the manufacturer or
local distributor, has not taken effective steps to ensure that its
product is manufactured properly, your client could find itself
facing substantial fines from regulatory authorities along with
class actions that can put a serious dent in your client's
As experienced product liability litigators, we see a number of
common difficulties that might be avoided through effective
negotiations and risk allocation When advising your client, you
should be discussing the issues outlined below as part of any
supply agreement, particularly when it involves multiple
Who is responsible for the design of
the product or the particular component?
If the supplier is responsible, what
steps can your client take to ensure that the component is
Will there be a clear line between
your client's responsibilities and those of the supplier, which
can be memorialized in the agreement?
Consider whether your client should
be entitled to access all drawings for design and the manufacturing
process. Do you want your client to be involved in the process or
should it be left to the supplier in order to keep those roles
clear and distinct?
Who tests the product? It is
preferable that all product testing be performed at an independent
laboratory. If product testing takes place at the supplier's
facility, it should be performed under the supervision or audited
by an independent party, and possibly including one of your
company's knowledgeable representatives. Again, it should be
clear that the responsibility for testing and its accuracy will
always rest with the supplier.
Is independent certification
necessary for the component, and if so, how is certification
Is the certification authority used
by the supplier reputable? Your client's defence that the
product was certified to all safety standards, will ring hollow if
the certification authority merely rubber-stamped the
certification. Consider retaining independent counsel in the
supplier's jurisdiction with product liability expertise. Their
assistance can help your client evaluate the certification process,
and other local issues, making the process more efficient and
Design & Manufacturing Consistency:
Where a company has effectively managed the above risks, it
often takes a company by surprise when its product ultimately
experiences widespread failures: "We thought we did everything
right!" Unfortunately, the supplier sometimes makes changes to
its product or components without notice. Where your client is
purchasing an integrated component, it may be impossible to
identify changes just by looking at the product. The solution can
be expensive. Therefore, consider the following:
The supply contract should include a right to audit the
supplier's facilities to ensure that the product is being made
If the supplier's component is such that a change could
only be identified by testing, then your client may need to ensure
testing is done on a regular basis.
Notice of Failure:
If something goes wrong, the only way to get ahead of the
problem is to know it exists. In order to avoid disputes, suppliers
may not reveal the existence of a problem, or the extent of it.
Information sharing is crucial.
It may be that the component in your
product is sold to other companies. You need to ensure that
contract terms require that your client is immediately advised if
there are failures in other products using that same component.
Unfortunately, it is ultimately the integrity of your client's
supplier that dictates whether it will be forthright with your
client regarding any failures, or whether it will try to
"manage" the problems themselves.
The issues outlined above are a subset of the opportunities
available to limit your risk of product failures. The financial
stability of the supplier can be crucial. You should also attempt
to manage risk via contractual provisions such as insurance, the
right to control the defence of any claims, defined
responsibilities, indemnification, and law of the contract.
Finally, you should consider how you will enforce all of these
rights: can they be backstopped with some form of attornment,
bonding or insurance so that you are not fighting jurisdiction
battles when claims arise? Once you have considered all of these
issues, you will be in a better position to impose responsibility
on the supplier.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The recent decision of the Ontario Court of Appeal in BMW Financial Services Canada, a Division of BMW Canada Inc. v. McLean provides some useful insight into the relationship between automobile dealers and the financing arms of the manufacturers for whom those dealers are franchisees.
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